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Tuesday, November 29, 2011

risk, reward - AAPL

We get a credit event in Europe, and we are on the path to World War 3. (I say that seriously.) No stock is safe, no high yielder, nothing. Its the low probability scenario. So I try to position to a large reward with a relatively minimal risk.

At this point, the major question is whether or not AAPL's multiple has stopped contracting. There is a compelling argument to say it has. Especially when comparing AAPL to other large caps with lower revenue growth. (And iTunes, iCloud and Apple's general attention to users are an extremely good form of stickiness that will maintain a huge cash flow.) Also, given the growth in iOS devices, I find it difficult to entertain a person who says "Apple's earnings will collapse".

From the technical perspective, its downside risk is 350 via a weak market back drop. Upside potential 425 from a stabilized market.

After AAPL reports the holiday quarter, it will have a trailing PE of mid 13, if its stock price is around 425. That is a 50 point run. Given AAPL's history of rallies, the move is not unrealistic.